Fonterra Co-operative Group Limited (FCG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Fonterra Cooperative Group FY '24 Q3 Investor Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Miles Hurrell, CEO. Please go ahead.

Good morning. Thanks, everyone, for joining us. I'm here in the room with Simon Till and Selena Robb. And so by now, hopefully, you've had a quick look at our release of the third quarter results, which includes an update of our earnings for the full year, milk price forecast for both the current and the season ahead. So I'll quickly run through that, and then we'll hand over for some questions. High level on the first slide, the Co-op has continued to perform strongly and building on the results that we reported at half year. And profit after tax for the continuing operations is just over $1 billion and which is up $20 million on the prior year. And this equates to earnings per year of $0.61, which is $0.01 lift on last year. Strong performance in the quarter has meant we have lifted our earnings guidance for the full year to $0.60 to $0.70, and I'll cover more detail when I talk about the outlook. On a 12-month basis, our return on capital is 11.9%, which is more or less in line with our forecast. We do expect that to taper towards the end the season down to 10% to 11%. Balance sheet remains strong due to the underlying earnings performance and, of course, our lower debt position. Slide 5 on the numbers actually, but your second slide, sorry. The overall -- overall, we're pleased with the operating performance for the quarter, particularly strong margin performance in both Consumer and Foodservice. Year-on-year, the growth in both those channels is largely offset by the Ingredients' performance with the margins are returned to more normal levels, and the margins we refer to there are predominantly the stream returns. Overall, the Co-op's operating performance for continuing operations is $1.4 billion, which is $86 million lower than last year. And this is set by the lower financing costs from both lower average earnings, of course, lower cost of funds, coupled with the reduced tax expense. This resulted in a profit after tax for continuing operations being up $20 million, as I say, just over the $1 billion, which is equivalent to $0.61. We've also shown the impact of the discontinued operations, which last year included the earnings of the net gain on sale for the Soprole business in Chile. The Co-op is well-positioned going into the final quarter. We have lifted and narrowed the earnings guidance to $0.60 to $0.70 per share, which is up from the $0.50 to $0.65 previously. And the lift reflects the strong third quarter performance of, again, Consumer and Foodservice with margins holding longer than anticipated. And noting, we still expect margins to squeeze in the last quarter as the higher milk price flows through these businesses as well as the normal seasonal impact we have following the milk curve. For the season, we're currently under our milk price. We had maintained a $7.80 midpoint with the range being narrowed to $7.70 to $7.90, reflecting where we are at this time of the year. In addition, given the strength of the balance sheet, we've also increased the rate at which we returned cash to the farmers over the July to September payments. And looking ahead to the new season, milk supply and demand dynamics remain finally balanced. The China volumes have not yet recovered to the historic levels. And given where we are early in the season, the uncertainty in the outlook and the ongoing volatility in the markets, we are starting with a cautious approach of an $8 milk price with a range from $7.25 to $8.75. So in summary, a really good performance again for the Co-op for the quarter. I'm pleased with the team's efforts and our focus on closing out the year and look to the year ahead. That's all I intended to say at this point. I'm now happy to open up this with the -- and the team. Thank you.

[Operator Instructions] Our first question comes from Nick Mar of Macquarie.

Just a couple of quick ones for me. Just on the earnings slide, you called out increased technology spend. Could you just put some quantum around it for the fourth quarter and just talk about what the sort of the next sort of 3 to 5 years? I sort of understand that it's a multiyear upgrade in the system you have.

Nick, Simon here. Yes, so they're sort of still being worked through in terms of the quantum. But I think if you look at maybe just a sense of what that looks like, where we show the increase in OpEx, about 1/3 of that increase relates to technology. So if you sort of annualize that on an annual basis going forward, that gives you a good sense of that. That sort of covers a few areas, obviously, just around systems but also looking to make improvements in relation to the 2 businesses, in particular, supply chain. So that's probably maybe a good guide to how you think about it going forward.

Sure. And is there a reasonable degree of [indiscernible] amendments in terms of what you should get out of the technology spend versus just replacing stuff, [ BAU ]? And is there a material sort of cost savings associated with that one to fall in place?

I think probably the biggest component of that will relate to reduced complexity. So I think it's definitely going to be a key enabler in terms of reducing and streamlining processes. So yes, I think there will -- it's definitely an enabler to those efficiencies going forward.

Right. And then just sort of in terms of the earnings. You had a number of years of things with, I guess, improved versus initial expectations and things be sort of sustaining at a higher level, not spending a number of moving parts. And you obviously moved away from the [ state ] given the sale of the Consumer business. But just on a steady-state basis, are you confident enough to say that you probably are running ahead of where you were previously expecting on a sort of normal year basis?

Look, it's hard to say at this stage. I mean all business units and channels are performing or slightly above expectation of where we sort of set out. There's not one or two that's standing out, which give us the confidence to say that we've sort of done a step-change in that, clearly, but -- and that's after you strip out stream return, which is obviously been a big part of our performance earlier in the season. As we get into sort of thinking about the year ahead and our earnings guidance, we'll come out a bit more clarity on that if we see if anything's changed, but I wouldn't see too much in there at the moment. It's probably my early take.

[Operator Instructions] Our next question comes from Arie Dekker from Jarden.